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With Donald Trump and mercantilism, our political and economic liberties are at stake: Paul Heise

Posted
Wednesday, July 26, 2017 12:37 pm

In 1776, Thomas Jefferson called for political freedom in the Declaration of Independence. In that same year, and in support of that political freedom, Adam Smith called for economic freedom and an end to mercantilism in his book “The Wealth of Nations.” It was the end of imperial control in America and the beginning of the spread of markets across the globe. Until Donald Trump became our president.

“The Wealth of Nations” remains an important book because mercantilism and capitalism are still contesting the place of markets in an economy. “The Wealth of Nations” is the argument for free markets. The 18th century contest between a protectionist mercantilism and free-trade market economics or capitalism never really went away.

Mercantilism, the idea that the government should manage international trade and investment, is resurgent today. Adam Smith never put it in writing, but in a talk he gave he somewhat overstated his case: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice.”

The invisible hand of nature could then take its course. Adam Smith called this his obvious and simple System of Natural Liberty. But Smith was no libertarian. He explicitly condemned multinational corporations — in his day, the East India Co. or Hudson Bay Co. Today it would be firms such as Microsoft, GE and Goldman Sachs. Under mercantilism, corporations were managed by the government to achieve a positive trade balance, home production (jobs) and generally wage economic warfare with competitor countries.

Mercantilism first and foremost advocates nationalism. All policies that mercantilism advocates are designed to strengthen or enrich the home country. Trade is viewed as a zero-sum game and the score is reflected in the trade balance. A positive trade balance, especially in manufactured goods, reflects a winning score. The British mercantilistic treatment of the American colonies is that long train of “abuses and usurpations … cutting off our trade with all parts of the world and imposing taxes on us without our consent.” The Declaration of Independence enumerated the colonial abuses.

Mercantilism or protectionism never completely went away but is resurgent under Trump’s call for “free, fair and smart trade.” The United States led the post-World War II trade regime in a multilateral GATT (General Agreement on Tariffs and Trade) and WTO (World Trade Organization), series of multilateral “rounds” of trade negotiation. For all intents and purposes this eliminated tariffs as an economic consideration for industrialized countries.

These negotiations called for private markets that eliminated not just tariffs, but nontariff barriers and set up protocols on things like dumping, countervailing duties, and buy-national regulations. The whole trade negotiation program was an attempt to implement Smith’s System of Natural Liberty. Now Trump is taking the United States out of the Trans-Pacific Partnership and similar negotiations and he plans to renegotiate the North American Free Trade Agreement.

These agreements are not really trade agreements. Rather, they set up access to private courts for multinational corporations. They are not mercantilistic either since they do not serve the state but neither are they part of the free market economy. They serve the private interests of the corporations and suffer the same problems that the East India Co. faced when it tried to encroach on the sovereign.

When Trump talks about imposing tariffs on steel from China, he is in more familiar territory and that is protectionism, pure and simplistic. That’s what starts trade wars or even real wars. Trade wars are like a barroom brawl, a negative sum game where everyone is a loser. Call it what you will, mercantilism, isolationism, protectionism, it is bad for everyone.

Politicians and citizens think they are fighting about deregulation, small government, and trade agreements.. We are really fighting to maintain Adam Smith's freedom and Thomas Jefferson's political freedom in the face of mercantilists, multinational corporations and rapacious politicians.

Paul A. Heise, of Mount Gretna, is a professor emeritus of economics at Lebanon Valley College and a former economist for the federal government.